LIMITED PARTNERSHIPS AND THE FINANCIAL MARKETS

03 October 2017 by Erin Littbarski & Anchi Huang

Many investors are participants in Limited Partnerships (LPs), sometimes as Limited Partners with no management responsibilities, but sometimes also as Directors and/or shareholders in the General Partner. To protect their interests and also to avoid any potential liability, all investors in LPs should be aware of Limited Partnership and General Partner obligations under the Financial Markets Conduct Act 2013 (FMC Act).

Participants in some LPs, particularly those LPs that were in existence before the FMC Act, are not aware that the FMC Act still applies to them.

This unsatisfactory state of affairs should be rectified as a priority because the Financial Markets Conduct Amendment Regulations 2017 have recently introduced civil liability consequences for breaches of disclosure obligations that apply to offers that rely on the disclosure exemptions under Schedule 1 of the FMC Act. Depending on the breach, the penalties can be as high as $5,000,000 for serious breaches by the General Partner of the Limited Partnership (the General Partner is deemed under the FMC Act to be the issuer/offeror of partnership Units/interests and is therefore liable for FMC Act compliance).

As an interest in a LP will typically be a financial product (managed investment product) under the FMC Act it is important for a General Partner to be familiar with the required disclosure obligations.

Any offer of a financial product requires full disclosure (including a Product Disclosure Statement, registration with the Disclose Register etc) and substantial governance requirements unless one of the exemptions under Schedule 1 of the FMC Act applies (in some cases, such as forestry schemes and bloodstock syndicates, special exemptions apply). This means that an LP needs to carefully assess to whom partnership interests are offered and which compliance obligations must be met.

Even if the LP was established before the FMC Act came into force, new investors into the LP, increases in LP investments (and sometimes even transfers of LP interests) will be subject to the FMC Act and may require disclosure or limited disclosure.

For example, not providing a required wholesale investor Warning Statement or transacting without receiving the investor's acknowledgement of such Warning Statement could incur a penalty of $600,000 for a General Partner.

Also, the General Partner of an LP is required to file an Annual Return every year with the Companies Office. The Annual Return Form requires it to provide detailed information on whether the LP has been the offeror of a financial product under a regulated offer under the FMC Act or whether the LP relied on one of the exemptions from the disclosure requirements under the FMC Act. In order to file a correct Annual Return it is important to understand the LP’s obligations under the FMC Act.

Limited Partners may be transacting partnership interests without the knowledge of the General Partner. That will not excuse the General Partner from potential liability. Accordingly, the LP needs to be structured carefully with appropriate documentation, either at the time of establishment or by way of amendment, designed to enable the LP and General Partner to meet their obligations without unwitting liability.

The FMC Act is a complex and detailed area of law and, even if LP participants are experienced in LPs, the Act requires LPs and General Partners to obtain specialist advice, which Stace Hammond can provide, to avoid civil penalties being incurred.

General Partners which do not take appropriate legal advice and subsequently incur civil penalties may find themselves also being liable to action by the Limited Partners (as well as reputational damage).

Stace Hammond encourages all those involved in LPs to seek, as a priority, legal advice on any current or new LP structure to ensure ongoing compliance with the FMC Act.